Small Firm Contribution to Job Growth

The U.S. Bureau of Labor Statistics (BLS) recently produced research that builds on a topic the Atlanta Fed earlier addressed: job creation and destruction rates by firm size. In our research, we identified a disproportionately larger impact on small firms (those with fewer than 50 employees) over the 2007–09 period than the 2001–03 period.

In the recent BLS study, Jessica Helfand finds that actually it looks like the 2001–03 period may be the odd man out in at least one respect when it comes to recessionary effects on small business. Using unofficial data for the 1990–92 period to supplement the official Business Employment Dynamics data, Helfand shows that the gap between job destruction and creation for large versus small firms (in this case firms with fewer than 100 employees) over the 2001–03 employment downturn was much larger than in either the 1990–92 or 2007–09 episodes.

In particular, for the period June 1990 to March 1992, firms with fewer than 100 employees shed on net 160,000 jobs versus 110,000 from firms with more than 100 employees—a small-to-large firm destruction ratio of 1.46. For the period March 2001 to June 2003, small firms shed 79,000 jobs while larger firms destroyed 324,000 jobs—a small-to-large firm job destruction ratio of 0.24. Using the latest available data that cover the period September 2007 to June 2009, small firms lost 467,000 jobs compared with 543,000 for larger firms—a small-to-large firm job destruction ratio of 0.86.

Interestingly, the latest observation (for March–June 2009) shows that job destruction actually declined for smaller firms relative to larger firms whereas job creation rates improved for both small and large firms. This performance matters because the key factor for a sustained recovery will be a continued improvement in job creation rates at existing firms and stabilization in the rate of new business formation.

By Ellyn Terry, a senior economic research analyst in the Atlanta Fed’s research department

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